PE’s AI exposure has institutional investors on alert

Institutional investors are urging private equity and alternative asset managers to disclose more about their ties to artificial intelligence (AI), as trillions of dollars pour into the AI sector, according to a Bloomberg report. Pension funds, insurers, sovereign wealth funds, endowments and foundations are increasingly requesting managers to outline AI-related investments within their portfolios.

The concern is that AI exposure might be significantly larger than perceived, as these investments could be spread across various strategies. Data centers, for example, might be categorized as real estate or infrastructure, while semiconductor investments could appear within technology allocations. Some investors are contemplating whether AI-linked assets should be excluded from infrastructure strategies.

One Canadian pension fund turned down a co-investment in a data center due to worries about elevating overall AI exposure. Alternative asset managers have become crucial funding sources for the AI-driven infrastructure boom, financing data centers, electricity generation, energy networks and semiconductor-related assets. However, the rapid growth has raised fears that a potential AI downturn could negatively impact private market portfolios.

The sector's interconnectedness is another source of concern. Investors are closely examining self-funding transactions among AI firms, technology providers and infrastructure businesses, which could create additional vulnerabilities if valuations decline. Lending to semiconductor manufacturers and AI hyperscalers for equipment with short lifespans is also causing questions for infrastructure investors, as traditional infrastructure strategies usually focus on assets that remain productive for decades.

Some chip manufacturers and AI companies have attempted to alleviate the issue by providing residual-value guarantees to assure lenders that leased equipment will maintain a minimum value. However, investors remain skeptical that such assumptions hold up if demand for computing power dwindles. For limited partners, determining the total AI exposure is becoming increasingly complex, as investments spread across several funds managed by the same sponsor.

This issue extends to the concentration of AI investments across a manager's broader platform. For instance, Brookfield Asset Management has a dedicated AI infrastructure strategy, while other aspects of its business, like energy, can benefit from the increased electricity demand associated with AI. Blackstone also has AI-related investments across multiple strategies, including data centers and power generation.

This cross-fund exposure can make it difficult for limited partners to gauge the potential impact of an AI correction on their overall commitments to a manager. The scrutiny is ongoing, even as some institutional investors have gained substantially from the AI boom. The Ontario Teachers' Pension Plan, for instance, credited part of its 9.5% first-half return to an investment in SpaceX, which involves rockets, satellites and AI.

The CAD303.2bn pension fund is still working to ascertain the scale of its direct exposure to assets connected to what its chief investment officer for asset allocation, Stephen McLennan, refers to as the "AI complex."